Missteps in tax benefit documents lead to review of approval processes

Nathan Baker • Feb 18, 2017 at 11:32 PM

Two significant missteps were unveiled recently in job creation requirements written in tax incentive agreements with companies after the Johnson City Press requested those jobs figures from Johnson City and Washington County, leading to changes in the agreements and their approval processes.

The first, according to county attorney Tom Seeley, happened when a similar document under consideration at the same time was copied into a payment in lieu of tax, or PILOT, agreement.

Instead of requiring Telford bearing manufacturer Nakatetsu Machining Technologies to maintain at least 58 jobs or face increases in the payment schedule partially exempting the company from paying property taxes, the signed and executed document required 100 jobs at the end of the PILOT’s seventh year. Koyo Corporation of USA, which also built a plant and entered into a PILOT agreement with the county development board in the same year, should have been required to maintain 100 jobs, and Nakatetsu’s figure should have been 58, Seeley said.

Ten years after the agreements were signed, the county discovered the discrepancy — and realized the companies’ jobs creation had not been properly documented according to the agreements — after a Press reporter requested the job creation numbers.

Similarly, after a reporter requested job creation numbers on Feb. 7 regarding NN Inc.’s headquarters expansion project in Johnson City, the city Industrial Development Board met Thursday and recommended the city commission push a job creation penalty deadline back three years for NN Inc. to correct what a press release from the body called “discrepancies between the resolution and an accompanying tax agreement regarding timelines of employment level targets.”

Though a commission resolution authorizing the PILOT agreement required NN Inc. to maintain at least 80 percent of 200 promised jobs at its new global headquarters by the end of 2016 or pay a portion of the taxes it’s currently exempt from paying, board members and economic development staff said that deadline should be 2019, a five-year term that matches requirements in a $2 million grant from the state.

Northeast Tennessee Regional Economic Partnership CEO Mitch Miller, whose organization is charged with managing the operation of the city’s industrial development board, said local officials knew the timeline they were putting in place when the resolution was enacted, but said NN’s leaders assumed the employment clawback provisions would kick in after five years, the period written into a separate grant agreement with the state.

“In terms of the actual resolution, we were operating on the assumption of a three-year term, that’s what was presented,” Miller said Friday. “There were two grants, one state and one local, and on the local side, it was three years from 2014. The grant from the state was on a five-year term. That’s where the discrepancy came in, and on the IDB’s part, it made sense to match the local incentives with the state’s.”

Miller said his employees and city leaders were already discussing how to proceed with the missed job creation target before the Press requested the reports.

NN has been a lucrative partner to the city since the tax agreement was drafted, he said. The company has added 43 jobs since 2014, and its $6.5 million in annual employees’ salaries produces a $19 million impact on the local economy.

NN, which makes bearings and rubber components for vehicles, maintains several manufacturing plants worldwide, including in Erwin and Mountain City. Since the company signed the tax abatement schedule in 2014, it has acquired two other companies, Autocam Corp. and Precision Engineered Products, increasing its footprint in its industry.

Though the documents requested by the newspaper were in officials’ hands at the time the request was filed, they weren’t handed over until the industrial development board met and took action to recommend the PILOT changes. Miller said the delivery of the public documents were made in accordance with Tennessee’s open records laws.

According to that statute, custodians of public records “shall promptly make available for inspection any public record not specifically exempt from disclosure.” If promptly producing records is not practical, within seven business days, the custodian must produce the record, deny the request or tell the person requesting the record when the information can be produced.

A request at 10:07 a.m. on Feb. 7 for the jobs reports was answered by industrial development board attorney Rick Beeson at 4:53 p.m. on Feb. 16, the seventh business day. The development board meeting convened at 2 p.m. that day, and a press release announcing the board’s decision to change the timeline was sent to media outlets at 4:32 p.m.

Tennessee Coalition for Open Government Executive Director Deborah Fisher said the withholding of the documents until after the board met was “suspect.”

“The law requires a prompt response, unless it’s not practical,” she said Friday. “If the information was readily available, it’s certainly suspect that it was not promptly given to the newspaper.”

After years of failing to record Nakatetsu and JTEKT’s job creation figures, both companies reported on time this year. They submitted reports for 2016 on Jan. 25, six days before the deadline in the PILOT agreements.

According to JTEKT’s filing, the vehicle bearings plant had 172 full-time employees at the end of 2016, an increase of 41 from the year prior. The company easily hit the 100-job target set in the agreement allowing it to make discounted payments to Washington County instead of paying property taxes at full assessment.

Nakatetsu, which makes tapered roller bearings in conjunction with JTEKT’s operation, employed 75 at year’s end. The company exceeded the 58 employees goal listed on the 2016 tax year job creation form, but with a caveat.

“This jobs/employees figure is still being reviewed,” a note on the form states. “However, it has been determined that the figure of 100 was incorrect. It is anticipated that the appropriate figure will be approximately 58 although it could be slightly more or slightly less.”

Seeley said he recommended the county not assess a penalty on the company, because once the county industrial development board meets to change it, the county would have to resolve an overpayment, likely paying money back to Nakatetsu.

He said Nakatetsu’s attorney told him in an email he had documentation proving the original jobs figure in the agreement should have been approximately 58 employees.

Seeley said in March or April the board will meet to receive a presentation from the company’s attorney showing the information he’s collected and to consider amending the original agreement to lower the number of required employees.

The next step in Johnson City is a city commission meeting, potentially on March 2, when commissioners will consider changing NN’s PILOT agreement to push the jobs deadline back to the end of 2019.

In the meantime, Miller said economic development staff were reviewing PILOT agreement processes, and plan to set future job creation goals at the five-year mark.

“We’re looking at making the five-year time frame consistent between our incentives and the state’s,” he said. “We were asked by the IDB to bring the PILOT agreement guidelines to the next board meetings, so they can review them and make modifications.”

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